When vacancy rates are up, as they have been in the Twin Cities in recent months, it’s sometimes difficult to remember the impact lowering rent in order to stay occuppied can have.
While I have always believed it’s better to have a unit full at a slightly lower rent than it is to hold out for top market value, waiting for months on end for that tenant to appear, I was reminded over the weekend that this practice can be taken to an extreme.
A client was interested in a property just two blocks from Lake Harriet. The duplex had all the vintage charm and curb appeal necessary to rent quickly and easily, even in the most difficult of markets.
And yet, the tenant-occupied unit was leased at a rate nearly 26 percent, or $350 below what the going market rent is for the area, even in a depressed rental market.
What’s the big deal? Well, $350 x 12 months a year = $4200 in lost revenue a year. In a neighborhood where recently sold properties averaged an off market gross rent multiplier that was 12-13 times the amount of rental revenue, this “discount” devalued the seller’s property by more than $50,000.
To my FHA-approved buyers, who can use 75 percent of the rental income to help them qualify to buy the property, it also meant $3100 in lost qualifying income.
I’m sure the sellers were well-intentioned in offering their tenants a terrific deal. And, their building is occupied. In this instance, however, a little bit of kindness may cost them a lot.